WASHINGTON, October 11, 2012 – The U.S. dairy market can no longer depend on predictable market cycles that were the custom from the 1990s through the mid-2000s, Rabobank’s Food and Agribusiness Research and Advisory group said in an industry note published to clients Wednesday.

U.S. milk prices followed mostly predictable cycles in the past, “with highs and lows occurring at almost regular intervals,” Rabobank said. “Many in the industry still see the market through this prism, and plan according to assumptions that a regular pattern of highs and lows can be expected,” said the report, titled “Dysrhythmia: The End of the Old U.S. Dairy Price Cycle.”

Rabobank says the abrupt change in domestic milk market fundamentals comes as the U.S. dairy industry finds itself part of the global market, ending decades of isolation. “The explosion of prices on the world market encouraged the U.S. to begin supplying large volumes of exports to the international market, with no need for government subsidies to do so – quickly bringing the U.S. and international dairy prices into alignment,” the report said.

However, it added that exposure to the world market brings “extreme diversity and volatility – including factors such as income growth in the developing world, dietary shifts, product contamination, shifting regulation and currency strengths in import regions.”

Even before the sharp increases in global demand for U.S. dairy products, the report added, USDA price and income support programs had become less effective in providing a safety net. In particular, the dairy product purchase program became less and less able to provide a price floor for milk as the guaranteed purchase price was reduced and milk production costs increased.

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The report also noted that producers continue to face volatile feed prices, making the less-regular dairy price cycles even more difficult to predict. In the past, feed costs for dairy producers were reasonably stable, more or less tracking the costs of producing corn, soybeans and hay. As a result, dairy producer margins tended to be revenue-driven, rising and falling with the milk price they received. “Since 2007, however, feed prices have shifted to a higher trading range and now short-term shifts in the cost of feed do not necessarily track those of milk prices – with revenue and costs moving in the opposite direction at times,” Rabobank points out.

With the dairy pricing cycle no longer predictable, the report concludes with recommendations on how U.S. dairy operations can embrace this new challenge including locking in the prices of milk and feed through the use of listed future contracts and/or forward contracts.

The report came one day before USDA’s World Agricultural Supply and Demand Estimates once again trimmed its 2012 milk production forecast to 199.6 billion pounds. It said that slower growth in per-cow production more than offset a slowing decline in cow numbers. USDA expects higher milk prices in late 2012 into 2013, further slowing the rate of decline in cow numbers and helping support higher growth in milk production per cow in 2013. The forecast for 2013 milk production is up only barely from this year at 199.7 billion pounds. The average all-milk price is estimated at $18.50-18.60 per hundredweight this year, $19.00-19.90 next year.

 

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